Essential Reading

With Afghanistan and Iraq already lost, the Wall Street bankers were all desperately looking for other ways to control our world, when suddenly and very conveniently, the Sumatran Trench exploded. Trick or Treat? Joe Vialls investigates

Long before it became a crime in some countries to question the Holocaust, in fact before it is even supposed to have happened, Zionists were invoking the figure of “Six Million” and talking of a sacrifice for Israel

The brilliant examination of the ‘Holocaust’ by Anthony Lawson has since been censored on the basis of a false Copyright infrigment. But as Lawson explains, this just another attempt to stiffle freedom of expression

Mark Gaffney – Chapter 3

AIG and the Linkage to the Drug Trade

The more one studies the dark history of the US national security state, the more transparent the CIA – Wall Street connections become. The links to the international drug trade are less obvious, but have existed from the beginning, that is, from the days of the Office of Strategic Services (OSS), the forerunner of the CIA. Time and again, the same pattern has played out: US military interventions in Southeast Asia, Central America and, since 2001, Afghanistan and Iraq, have been accompanied by a sharp increase in narco-trafficking, with all of the attendant evils. These include the plague of drug addiction, drug-related crime, the devastation of the family and as I hope to show, the corrupting of democratic institutions at home and abroad.

The morally bankrupt policies that are responsible for all of the above have had another deleterious effect: They have crippled our nation’s capacity to play a positive role on the world stage. It is no wonder that foreigners no longer view the United States with admiration and respect, but increasingly with fear and loathing. But US elites are oblivious to such concerns. They do not care, and are quite candid about what they view as the CIA’s pragmatic “need” to associate with unsavory individuals and criminals in the interest of furthering US foreign policy goals. Their realpolitik can be read between the lines of the policy papers. Take, for instance, the 1996 intelligence report, already noted, prepared by Maurice “Hank” Greenberg for the Council on Foreign Relations (CFR), and for which Greenberg was nominated to replace John Deutch as director of the CIA. In the paper Greenberg affirms that “the capability to undertake [covert operations]….constitutes an important national security tool.” Later, in the section titled “Intelligence and Law Enforcement” he insists that

“foreign policy ought to take precedence over law enforcement when it comes to overseas operations. The bulk of U.S. intelligence efforts overseas is devoted to traditional national security concerns; as a result, law enforcement must ordinarily be a secondary concern. FBI and Drug Enforcement Agency (DEA) agents operating abroad should not be allowed to act independently of either the ambassador or the CIA lest pursuit of evidence or individuals for prosecution cause major foreign policy problems or complicate ongoing intelligence and diplomatic activities.”

This means, over and above diplomacy, that when criminals are judged to be intelligence assets they are granted protection from prosecution for narco-trafficking, money laundering, extortion, rape, even terrorism and murder. In 1982, the CIA and the US Department of Justice actually worked out a secret agreement to this effect.[1] The deal exempted the CIA from having to report drug trafficking by CIA assets, which, notice, made a mockery of then presidential wife Nancy Reagan’s much ballyhooed “just say no” anti-drug campaign. At the time, most Americans trusted Ronald Reagan and believed that his administration was serious about the so-called war on drugs. But hindsight shows that the Reagan White House badly abused the public’s good faith.

The foreign policy advocated by Maurice Greenberg, above, is in large part responsible for the drug-related violence on the streets of our cities, and for the epidemic of narcotic addiction among our children, who have been sacrificed to the false god of national security. But the social carnage is not limited to the United States. Drug addiction in Muslim Iraq was almost unknown prior to the US invasion in 2003; but has since become a major problem. A similar recent explosion of heroin use has occurred in Iran, which, notice, is right next door to Afghanistan where the poppies are grown with the blessing of the CIA. Such foreign policies are evil, a scourge upon the planet, yet, are intimately associated with US empire building. Quite simply, the US power elite has followed in the footsteps of the British and French who, in their day, also exploited the immensely profitable opium and heroin trade. The writer Chalmers Johnson has termed this descent into darkness the sorrow of empire.

The CIA’s secret collusion with the Department of Justice [sic] gave the CIA veto over law enforcement, effectively blunting the capacity of US drug enforcement agencies to interdict the flow of illegal drugs into the US. The timing was no accident. The deal coincided with the start of the CIA’s Contra war in Central America. This explains why, the next year, the Drug Enforcement Agency (DEA), under pressure from the Pentagon, closed its office in Tegucigalpa, Honduras.[ii] The flow of drugs through Honduras had not diminished; in fact, just the opposite. For years, the country had been a transfer point for illegal drug smuggling into the US, a reality that Contra leaders readily exploited to finance their war against the Nicaraguan Sandinistas; and they did so with the full knowledge and approval of the CIA. For many years after, Langley’s veto blocked legitimate efforts by US law enforcement to curb the drug trade.

I must emphasize that, meanwhile, the American people were kept in the dark about the policy and its effects, at every point in the chain: from the formulation of the policy to its implementation to the phony packaging of the policy for mass consumption. In fact, we only know about it, today, thanks to a courageous journalist named Gary Webb, who published a groundbreaking series of articles in 1996 in the San Jose Mercury News, exposing Contra links and CIA complicity in the crack cocaine epidemic that ravaged the black communities of Los Angeles in the 1980s.[iii] The series, appropriately titled Dark Alliance, was one of the first big stories to be carried on the Internet; and later, Webb expanded it into an important book by the same name, in which he lays out the voluminous evidence in stark detail. But it was Webb’s series of articles in 1996 that initially focused media attention on the drug issue; and which compelled CIA director John Deutch to announce an internal investigation. Meanwhile, the agency simultaneously launched a disinformation campaign to discredit Webb, whom it viewed as a serious threat.

The campaign against Gary Webb has been called “one of the most venomous and factually inane assaults on a professional journalist’s competence in living memory.”[iv] The fawning mainstream press, always eager to do the CIA’s bidding, appeared to take pleasure in savaging the messenger, even while tacitly conceding that his facts were basically correct. One of the low points occurred on live TV, on November 15 1996, when NBC’s Andrea Mitchell, wife of Federal Reserve chairman Alan Greenspan, referred to Webb’s exhaustively documented expose as “a conspiracy theory,” the kiss of death for any serious journalist.[v] At this same time, as we know, Greenspan was busily engineering the deregulation of Wall Street, setting the stage for the 2008 financial meltdown of the global economy.

CIA Inspector General Frederick Hitz led the internal probe, and even though his conclusions later confirmed Webb’s main thesis, the CIA suppressed Hitz’s report, even while leaking a denial of the allegations. The CIA’s minions in the press corps did the rest. On December 19, 1998, an article by Tim Weiner in the New York Times and another by Walter Pincus in the Washington Post cited “unnamed sources” who insisted that Hitz had found no “direct or indirect” links between the CIA and cocaine traffickers. This was a blatant lie, indeed, a breathtaking example of deception. But it had its imtended effect. Neither reporter bothered to ask why Hitz’s report was still under wraps.

How could the mainstream press fumble the ball so badly? There are a number of reasons, but probably the main one is that, in the 1990s, the issue of CIA complicity in the drug trade was politically out of bounds, simply unthinkable, beyond the realm of the possible. Today, things are a little different. In 2011, the CIA’s support for Afghan drug lords is out of the closet. Even the major US papers have reported it.[vi] However, in the 1990s, the political climate simply would not allow an honest airing of the issue (much as 9/11 is taboo, today). Webb’s publisher ultimately caved under pressure and threw his Pulitzer Prize winning reporter under the bus, even as Webb was turning up fresh confirmatory evidence which indicated that, if anything, he had under-stated the case against the CIA.[vii]

When CIA Inspector General Fred Hitz finally testified before the House Intelligence Committee, in March, 1998, he admitted it was all true. Said Hitz: “Let me be frank about what we are finding. There are instances where CIA did not, in an expeditious or consistent fashion, cut off relationships with individuals supporting the Contra program who were alleged to have engaged in drug trafficking activity…”[viii] On hearing this, Congressman Norman Dicks of Washington button-holed Hitz with the obvious next question: “Did any of these allegations involve trafficking in the United States?” “Yes,” Hitz replied, and went on to explain about the CIA‘s secret arrangement with the Department of Justice. According to Webb, who was in attendance, at that point, a murmur swept through the hearing room as the meaning of Hitz’s testimony sank in.[ix]

Of course, by this time, Webb’s career as a journalist was over, destroyed. The CIA’s vilification campaign had produced the intended result; and, next day, the Washington Post buried its story about Hitz’s testimony deep in the paper, along with its own culpability for helping to trash the reputation of one of America’s bravest muckraking writers. And why? Quite simply: for the crime of telling the truth.

We need to ask: How can such a miscarriage happen in a nation that prides itself on being a free and open society? I suspect the reader is not prepared for my answer, which I will present on the following pages. I must admit I was not prepared for it myself. The truth, as the reader is about to learn, is that complicity with narco-trafficking is both insidious and inexorable. It effects a corrupting influence on government at all levels, for government officials are not immune to the temptations of the drug trade. Which, after all, is the most profitable business on the planet by a wide margin. Arms smuggling comes in a distant second. As with derivatives and insider trading, the possibilities for abuse are as unlimited as the human imagination. The outcome of a secret policy of complicity was entirely predictable. I must admit, though, I was shocked to learn just how far up the food chain the rot extends.

Background of American Insurance Group (AIG)

AIG has always been an American-owned company, though it had its origins in China. Cornelius V. Starr founded AIG in Shanghai, in 1919, the first western insurance firm in the far East. From the start, AIG’s international focus was made-to-order for intelligence operations. In 1939, the Japanese invasion of China compelled Starr to relocate to New York, where, in 1943, he joined with OSS chief William “Wild Bill” Donovan to form a special insurance unit to gather war-time intelligence about Nazi Germany and Japan. During the war, the OSS actually shared Starr’s offices in New York City. The special unit used Starr’s connections in China, including his Shanghai newspaper, as a spy network. Meanwhile, the special agents at the New York office sifted through mountains of insurance documents for blueprints of enemy bomb plants, the design of the Tokyo water supply, timetables for tide changes, and other details about shipping and manufacturing which aided the allied war effort. As World War II drew to a close, the special unit investigated how the Nazis might seek to launder their assets via phony insurance policies.[x]

In 1962, Cornelius Starr picked Maurice Greenberg to manage AIG’s holdings in the US, which were floundering at the time. Greenberg administered a quick turnaround and, in 1968, succeeded Starr as head of AIG.[xi] The next year, he issued a public stock offering and began to expand the company. According to various reports, Greenberg was a long-time confidant of Ronald Reagan’s CIA Director William Casey, who had headed the Securities and Exchange Commission under Nixon. Casey attempted to recruit Greenberg to be his deputy at CIA, but Greenberg declined, preferring to remain at AIG.[xii] Once, during a New York Times interview, Casey mentioned Greenberg as one of the few individuals outside of government whom he relied on for advice.[xiii] Henry Kissinger was another close friend and client. In 1987, Greenberg appointed Kissinger as chairman of AIG’s advisory board.[xiv] For years, both men lobbied China’s leaders to open the country to western investment, though Kissinger’s role is more widely known. In 1980, the Chinese finally granted Greenberg a license to sell insurance in Beijing, and in 1996 AIG reoccupied the same Shanghai offices originally used by C.V. Starr.[xv]

For years, AIG generated profits at a rate that blew away the competition. Over a ten-year period, from 1988-1998, AIG’s earnings compounded at an average rate of 14%, an impressive figure in a business that tends to be cyclical.[xvi] While the rest of the insurance industry suffered periodic ups and downs, AIG behaved more like a “growth” company. Its consistently high earnings wowed investors. Some compared AIG to a perpetual money-making machine. In a column, David Schiff, publisher of an insurance industry newsletter, wrote that “AIG is to the insurance business what the Yankees are to baseball.” The comparison was based on more than whimsy. Rumor had it that Maurice “Hank” Greenberg drew his nickname from the first Jewish superstar of baseball, Hammerin’ Hank Greenberg, whom the Yankees recruited in 1929 (but who played first base, most of his career, for the Detroit Tigers).

How did AIG beat the trends? Writing in 1998, Schiff acknowledged that “No one quite knows the answer. Some who follow AIG have told us they can’t really analyze it.”[xvii] Many investors did not bother to try. They simply accepted the fact that Greenberg was brilliant, and that AIG was somehow unique. The view expressed in 2002 by Morgan Stanley analyst Alice Shroeder was typical: “What investors really want is for Hank to become immortal.”[xviii] Some probably felt the same way about Bernie Madoff, but there were significant differences. AIG was no Ponzi scheme. Whereas other large insurance firms like State Farm were fairly simple to understand, AIG, by comparison, was “fabulously complex,” virtually impenetrable from the outside. The reason: AIG had hundreds of affiliates in 130 countries and did most of its business offshore, in other words, beyond the scrutiny of US regulators. The Wall Street Journal once referred to AIG as a “black box.” (The same op-ed also mentioned Enron.) This helps to explain why Greenberg and AIG remained untouchable for so long.

AIG was not solely an insurance firm. By the 1990s, Greenberg had diversified into other areas, such as derivatives trading, private banking, financial services, and asset management. Another division boasted the world’s largest airline rental company. But AIG achieved its lofty reputation by succeeding where others failed. I was surprised to read that most traditional insurance companies lose money underwriting policies. They turn a profit by shrewdly investing the premiums. AIG was different. It had a reputation for actually making money writing insurance policies; or so people thought. However, in the spring of 2005 when the dust finally settled, it was clear that AIG also lost money in the insurance business but obscured the fact through a myriad of creative accounting schemes that transformed AIG’s underwriting (business) losses to investment (capital) losses, a slick way to enhance AIG’s corporate balance sheets. One of Greenberg’s favorite expressions was: “All I want in life is an unfair advantage…”

After 9/11, it gradually became clear that not even AIG insiders were privy to the decisions being made at the top. In 2002, an internal audit committee reported that AIG’s financial accounting was suspect.[xix] Later that same year, the Securities and Exchange Commission (SEC) uncovered evidence of securities fraud. In 2000 AIG marketed an insurance product that enabled a company named Brightpoint Inc to conceal $11.9 million in losses.[xx] When the case was settled, the SEC doubled the fine to $10 million because AIG’s CEO Maurice Greenberg refused to cooperate. One of Hank’s tactics was to stall the investigation by delaying to hand over subpoenaed documents, including one internal white paper that “completely contradicted everything they’d been saying about how this was just the fault of one guy who wasn’t getting supervised.”[xxi] It turned out that scamming the system was company policy. In subsequent weeks, even as AIG sought to portray the Brightpoint case as an isolated incident, federal investigators uncovered another phony transaction that enabled a subsidiary of PNC Financial Services to remove problem loans and assets from its balance sheet, thus enhancing its financial position. AIG paid a $115 million fine. The shady transactions were reminiscent of Enron.

But it was only the beginning. Soon, AIG and Marsh & McLennan were in the cross-hairs of a state probe launched by New York attorney general Elliot Spitzer. In October 2004 Spitzer sued Marsh for bid-rigging and numerous other fraudulent accounting practices. As the investigation widened, Ace (run by Greenberg’s other son Evan), AIG, Hartford, and several other insurance companies were also named.[xxii] Spitzer refused to negotiate with Jeffry Greenberg, Marsh’s CEO, whom the attorney general accused of stonewalling. The apple, as they say, falls close to the tree. In the end, the younger Greenberg was forced to step down and Marsh paid $850 million in restitution. Two AIG executives pled guilty to criminal charges.

It is notable that Marsh & McLennan purchased Kroll from AIG for $1.9 billion in July 2004, several months before Spitzer’s lawsuit. At the time, Kroll’s CEO was Michael Cherkasky who, years earlier, had been Spitzer’s boss at the Manhattan District Attorney’s office.[xxiii] Cherkasky joined Kroll in 1994, became CEO in 2001, and replaced Jeffrey Greenberg as CEO when the younger Greenberg was forced out in late 2004.[xxiv] Thus, it was Cherkasky who negotiated the final settlement with Spitzer. Did AIG pass Kroll on to Marsh to better shield the spy firm from Spitzer’s investigation, as Richard Grove has suggested? Possibly. It certainly does appear that Cherkasky was named to lead Marsh because of his previous relationship with Spitzer.

By early 2005, separate SEC and Department of Justice investigations were closing in on the elder Hank. By this point, the AIG board was also pressuring Greenberg to name a successor and step down. But Greenberg, who was approaching his 80th birthday, had no intention of relinquishing control of the company he had dominated for 37 years. Maurice Greenberg had always viewed regulators with disdain, and he had generally succeeded in intimidating them, one way or another. In 1996, for instance, when the state of Delaware launched an investigation of AIG’s bizarre relationship with a Barbados-based reinsurance company named Coral Re, instead of cooperating Greenberg rang up the Delaware insurance commissioner and gave her a tongue-lashing over the telephone. Greenberg also sent Kroll detectives to harass the state regulators. The get-tough strategy produced the intended result. Even though state laws had been broken Delaware had no stomach for a fight. The regulators drew back. In the end, the state “whipped AIG with a feather.” AIG got off with a mildly-worded reprimand, and was not even required to pay a fine. No sooner had Coral Re been dissolved, as per the settlement, than AIG shifted its business to several new shell companies modeled in its image and likeness. The case of Coral Re is important because of possible links to the drug trade and to Arkansas Governor Bill Clinton, as the reader will shortly learn.

Greenberg also resorted to Kroll after AIG’s general counsel Michael Joye resigned in 1992 to protest fraudulent accounting practices. Joye kept the facts secret for many years. But here is the gist: In the early 1990s Joye was shocked to learn that AIG was cheating several states, including New York, out of tens of millions in workers’ compensation funds; and it was happening with the full knowledge and consent of CEO Greenberg. After conducting his own internal investigation, Joye sent Greenberg a bluntly worded memo informing him that AIG’s “intentional violations” could lead to “criminal fraud and racketeering charges,” in addition to exposing the company to astronomical civil penalties.[xxv] Joye determined that for AIG to become legal the company “would have to hire about 40 new people to do filings properly. It would also have to charge clients more and pay ‘much higher’ assessment frees.” But according to the New York Times, Greenberg was not interested. When the issue came up in a meeting, Greenberg famously asked “Are we legal?” An employee responded: “If we were legal we wouldn’t be in business.” Hearing this, “M.R.G. [Greenberg] began laughing and that was the end of it.”[xxvi] After Joye tended his resignation, Greenberg sent Kroll a copy of Joye’s personnel file. It is not known what Kroll detectives did with it, but the case illustrates Greenberg’s temperament and autocratic style.

By early 2005, AIG’s directors were pursuing their own internal investigation which eventually led offshore to several Greenberg-controlled corporations that were a part of the AIG empire. One was the Starr Investment Corporation (SICO), a mysterious holding company which dated to AIG’s original founding by Cornelius Starr. The other firm, C.V. Starr (also named after the founder), was no less mysterious. Both were based in Bermuda which is famous for having no corporate income tax. The island also attracts insurance companies because of the welcome absence of regulation. Both SICO and C.V. Starr held substantial amounts of AIG stock, and were used by Greenberg to reward top AIG executives. But C.V. Starr was also reserved for an inner circle who received lavish compensation.[xxvii] The inner group included Howard Smith, AIG’s chief financial officer, and Mike Murphy, SICO’s treasurer. It is curious that Smith had previously worked for PricewaterhouseCoopers, the company that, for many years, conducted AIG’s annual audits. How convenient.

The final showdown began on March 23, 2005 when a team of AIG lawyers arrived in Bermuda to examine SICO records and conduct interviews. The same facility housed both SICO and AIG employees. Martin Sullivan had already replaced Greenberg as AIG’s CEO. Greenberg still remained as chairman. However, by this point, a rift was developing between Greenberg’s supporters and the rest of the board, all of whom wanted the public relations disaster simply to end. The plot thickened when the directors issued a company-wide order to cooperate with regulators. The next day, AIG employees in the company’s Dublin office seized a SICO computer and placed it under lock and key. (Both firms also shared the Dublin office.) Things quickly escalated. Mike Murphy, a Greenberg loyalist, led a group of SICO employees into the Bermuda office, under cover of night, using a passkey, and hustled 82 boxes of SICO documents out of the building to a separate location. SICO was incorporated in Panama, a major center of money laundering, and there was concern that Murphy might attempt to move evidence beyond the reach of US law enforcement. The next day, an SEC official in New York received a message: “Looks like they’re destroying documents in Bermuda.”[xxviii] It was the last straw.

When word reached Spitzer he issued a stern warning to Sullivan, and also subpoenaed the SICO and AIG records. Sullivan personally flew to Bermuda, summarily fired Mike Murphy, and took possession of the documents. The AIG board, now under threat of criminal prosecution, had no choice but to demand Greenberg’s immediate resignation.

In subsequent months, the court proceedings played out in the press. The details gradually emerged about Greenberg’s largest deception: a $500 million deal “in which various AIG insiders staged an elaborate artificial transaction with the Gen Re Corporation,” a major reinsurer owned by Warren Buffet. AIG ostensibly bought $600 million in reinsurance from Gen Re for a $500 premium, indicating a risk of $100 million.[xxix] However, because Greenberg wanted zero risk exposure, the deal’s “purported terms were all undone” by his staff “in undisclosed side agreements” that rendered the transaction “a sham,” according to the SEC. Papers were altered to distort the nature of the transaction.[xxx] Buffet’s subsidiary provided records to Spitzer documenting everything. The records showed that AIG’s purpose had been to generate a large tax write-off, in order to make the company look more prosperous than it was. The documents also proved Greenberg’s personal involvement.[xxxi] One of the investigators told the New York Times that the intent may have been “to mask the the activities of murky offshore entities that AIG used extensively during Mr. Greenberg’s tenure at the company.”

In 2006, AIG reached a $1.6 billion settlement with state and federal authorities: the largest ever paid by any financial services company, in US history.[xxxii] In February 2008, four former executives of Gen Re and one from AIG were convicted of conspiracy, securities fraud, mail fraud, and making false statements to the SEC.[xxxiii]

It is important to remember that Maurice Greenberg is not some run-of-the-mill hoodlum. As noted, he served as chairman of the Federal Reserve Bank of New York, is a director of the New York Stock Exchange, is the vice-chairman of the Council on Foreign Relations, and is a member of the Trilateral Commission. He also served as vice-chairman of the Center for Strategic and International Studies, and is the Director of the Institute for International Economics, is the Director of the US-China Business Council, the vice-chairman of the US-ASEAN Business Council, the Director of Project Hope, founding chairman of the US-Philippine Business Committee, and, until his forced retirement, was a Trustee of the Asia Society. While this is not a comprehensive list of Greenberg’s credits, it should suffice to lend new meaning to the old adage that scum rises to the top.

After Hank’s departure from AIG, the new CEO Martin Sullivan told the press that the insurance giant would now prosper “with the right controls and checks and balances in place, and the right level of compliance.”[xxxiv] However, as we know, things turned out rather differently. By 2008 AIG was in dire financial straits, largely because of the company’s exposure to the sub-prime mortgage market (the outcome of zero regulation of derivatives). By September 16, 2008, AIG stock had fallen by more than 95% to just $1.25/share, from a one-year high of $70.13. For the year, AIG reported a $99 billion loss, and received a controversial $85 billion bailout.[xxxv] Greenberg pointed an accusatory finger at the current directors, and told the press that AIG’s sales of credit default swaps had exploded after he left. Sullivan denied this, insisting that AIG actually stopped writing credit default stops in 2005. By March 2009, AIG’s federal bailout had expanded to $150 billion, making it the largest single bailout by far in US history. AIG also set another dubious record when it posted a $61.7 billion loss for the final three months of 2008, the largest quarterly loss in corporate history.[xxxvi] That same month, AIG announced that it would disperse $1.2 billion in bonus packages to its employees, 73 of whom would receive checks of at least $1 million.[xxxvii]

The bonus announcement stirred understandable outrage. But the press failed to ask the really important questions. The investigations of the Greenberg empire showed that AIG was no different than the rest of the industry: AIG also lost money, at times, in the insurance business. Given that AIG managed its risks by ceding as much as 70% of its premiums to various reinsurers, this means that most of AIG’s insurance revenue was unavailable for investment. Nor can the remaining 30% account for AIG’s impressive earnings, over many years.[xxxviii] The question, therefore, is: how did Maurice Greenberg manage for so long to produce a silk purse from a sow’s ear? Did Greenberg succumb to the temptations of the powerful, and step over the line? What is clear is that AIG’s offshore dealings were key to the company’s profitability, even during the downturns that affected the rest of the industry but to which AIG seemed largely immune. David Schiff, a Greenberg admirer, put it this way: “AIG’s unique global franchise obscured the reality of the company’s financial condition.”[xxxix]

Former LAPD narcotics detective Michael Ruppert arrived at a different conclusion. In August 2001, just weeks before 9/11, Ruppert posted an article exploring possible AIG involvement in the drug trade.[xl] Ruppert was astounded to learn that Coral Talavera Baca, the wife (or girlfriend, it is not clear which) of Medellin drug lord Carlos Lehder was, at the time, employed at AIG’s San Francisco office, ostensibly as AIG’s office manager, a position for which Talavera had neither the requisite training nor the credentials. What was she doing there?

Amazingly, as it turns out, Coral Talavera Baca was the very same woman who in 1995 supplied investigative reporter Gary Webb with the initial lead that resulted in his groundbreaking series of articles in the San Jose Mercury News about CIA links to Latin American drug traffickers.[xli] Talavera’s husband, Carlos Lehder, was one of the central figures in the notorious Medellin drug cartel, led by Pablo Escobar, which in the mid-1980s grew into the world’s largest cocaine smuggling ring. At the time of Lehder’s 1987 arrest in a Columbian jungle, he reportedly cut a deal with US officials and was allowed to keep much of his estimated $2.5 billion fortune amassed from the drug trade.[xlii] Lehder was extradited to the US where he entered a witness protection program. But why would the US government negotiate with a man who had been public enemy number one? Lehder and his cohorts in Medellin are believed to have ordered the assassination of numerous Columbian officials, newspaper editors, journalists, informants, as well as 600 policemen; but are probably best known for their involvement in the grisly attack on the country’s Palace of Justice in November 1985 that left nearly 100 people dead, including eleven of Columbia’s supreme court justices. Lehder was a bad apple.

According to the Pittsburgh Post-Gazette, it was none other than Vice President George H.W. Bush who negotiated the deal with Lehder.[xliii] I was shocked to read this, until I recalled that Ronald Reagan named Bush in 1982 to head up his so called war on drugs. As we will discover, this explains many things.

Although Lehder testified for US prosecutors at the 1992 trial of Manuel Noriega, his testimony proved of little value to the prosecution. According to knowledgeable observers, Noriega’s conviction was a foregone conclusion, with or without Lehder’s testimony. Some wondered why the US was so interested in Noriega, in the first place, since Lehder was a much bigger fish in the drug world. Narcotics expert Alfred McCoy may have provided the answer when he speculated that the US prosecution of Noriega probably had nothing to do with curbing the drug trade and everything to do with projecting US power in Central America. Noriega’s crime was that he turned nationalist, developed his own power base, and sought to chart an independent path, much like his predecessor, General Omar Torrijos, who died in a mysterious plane crash, probably orchestrated by the CIA.[xliv]

Three years after the Noriega trial, Lehder complained in a letter to U.S. District Judge William Hoeveler of Miami that he had been double-crossed by the US government. Weeks later, according to eyewitnesses, Lehder was whisked into the night from the witness protection center at Mesa, Arizona. He was not seen again for ten years, until 2005, when Lehder appeared in a Florida courtroom to appeal his life-in-prison-sentence-plus-135-years. The judge dismissed the appeal out of hand. No mystery there. But what about the $2.5 billion in assets that Lehder reportedly retained? I had hoped to interview Coral Talavera Baca who, no doubt, has the answers. Unfortunately, I was not successful in contacting her. In 2011, the questions raised a decade ago by Mike Ruppert about Baca’s connections with AIG, and AIG’s possible involvement in the drug trade, remain unresolved.

Yet, it is curious that Maurice Greenberg chose to expand into the financial services sector in 1987, the year of Lehder’s arrest in Columbia. Not only does the timing correspond with the sharp upsurge in the volume of revenues from the international drug trade, which by the late 1980s exceeded an estimated trillion dollars a year,[xlv] that same year, AIG also entered into a bizarre relationship with a Barbados-based reinsurance company named Coral Re. The details, as I have noted, came to light in the mid-1990s when Delaware state regulators discovered that AIG secretly controlled Coral Re. In the insurance world, companies often reduce their exposure to underwriting losses by passing on a percentage of the risk to insurance wholesalers, also known as reinsurance companies. As payment, the reinsurance companies receive a percentage of the premiums. Wholesalers are generally based offshore in places like Bermuda, Barbados, the Caymans, and Luxembourg, where taxes are minimal or nonexistent and accounting records can legally be kept secret. Although US state laws require insurance companies to keep a certain amount of capital in reserve to cover losses, the amount is less if a company has reinsurance. AIG was a major user of reinsurance because it specialized in high-risk policies. For regulatory reasons, however, both parties to such a transaction, i.e., the insurer and reinsurer, must be independent of one another, for obvious reasons. If the two are affiliated, then there is no true risk reduction. This was the issue with Coral Re, and what attracted state regulators in the first place, because, despite persistent denials by AIG, Coral Re turned out to be a shell company created by AIG for reasons that have never been made clear. At the time Coral Re was established, the broker Goldman Sachs sent around a confidential memo which cautioned that the whole business must be kept secret. Indeed, the memo stipulated that all copies of the memo were to be returned to Goldman Sachs. When Delaware state regulators nevertheless managed to obtain a copy, they were incredulous.][xlvi The dozen or so investors who lent their names put up no money of their own, yet were guaranteed a profit, a sweet deal if there ever was one. Within days of its creation, Coral Re recorded $475 million in losses, which soon topped $1 billion. Between 1987-1993 AIG ceded $1.6 billion of insurance premiums to the new reinsurer. Yet, Coral Re’s total equity capital never exceeded $52 million.[xlvii] In addition to being severely under-capitalized, the new company had no actual offices of its own. In fact, it was managed by a subsidiary of AIG. Coral Re’s board of directors made no decisions and conducted no business. At the time, the chief operating officer at Goldman Sachs was Robert Rubin, who later served as President Bill Clinton’s Treasury Secretary.

Rubin’s main “achievement” during his tenure at Treasury was persuading Clinton to support repeal of the 1933 Glass-Steagall Act, a key part of Franklin Delano Roosevelt’s New Deal program. Glass-Steagall had created a regulatory firewall between commercial and investment banking, for the soundest of reasons: to prevent conflicts of interest and other abuses within the banking system. But Robert Rubin, Alan Greenspan and others on Wall Street viewed the New Deal as an aberration, and by 1999 they brought Clinton around.[xlviii] In 1998, Rubin also joined with Greenspan in blocking attempts by Brooksley Born, chairman of the Commodities Futures Trading Commission, to regulate derivatives, which Born and others correctly saw as a threat to the stability of financial markets.[xlix] The result was the disaster we have witnessed in recent years. The defeat of every attempt to regulate derivatives, together with the repeal of Glass-Steagall, opened the floodgates to the wild speculation that characterized the G.W. Bush years, and is responsible for the derivative schemes, real estate bubble, collateral debt obligations, sub-primes, credit default swaps, legalized skimming rackets and, ultimately, the global financial meltdown in 2008. In short, we have suffered a replay of the roaring twenties when bankers showed they were incapable of regulating themselves.

After Rubin’s departure from Treasury he joined the board of Citigroup, the largest US bank, which had recently been rocked by several huge money laundering scandals, one involving Mexican President Salinas. In 2001, the pattern repeated itself when Citigroup paid $12 billion to acquire the second largest bank in Mexico, Banamex, whose owner Roberto Hernandez Ramirez was known to be deeply involved in the international drug trade. In December 1998, the daily Por Esto!, Mexico’s third largest newspaper, reported that Ramirez’s estate on the coast of Yucatan was a regular transshipment point for tons of South American cocaine. According to local fishermen, the coke arrived by boat during the night and, after being offloaded, was sent to the US via small planes operating out of a private airstrip on Ramirez’s sizable estate. The property is located on the tip of Punta Pajaros, which in English means Bird Point.[l] So flagrant was the trafficking that local people dubbed it “la peninsula de la coca,” i.e., the cocaine peninsula. When Ramirez sued Por Esto! for libel, a Mexican court threw out the case after finding that the evidence for narco-trafficking was genuine.[li] A succession of Mexican presidents, including Ernesto Zedillo and Vicente Fox, reportedly vacationed with the drug lord banker at his lavish estate, as did President Bill Clinton in February 1999.

No question, Citigroup acquired Banamex to gain easy access to drug money, which many US banks now depend on for liquidity. In 2009, Antonia Maria Costa, head of the UN Office on Drugs and Crime, told the press that billions of dollars of laundered drug money had saved the financial system during the 2008 meltdown on Wall Street.[lii] But not even laundered drug money could save Citigroup. The bank suffered enormous losses due to its sub-prime exposure, and at the height of the crisis received a $45 billion transfusion from the Federal Reserve, the second largest bailout after AIG’s. By December 2008 Citigroup’s stock had plummeted to $8/share from a high of $55 in 2006. Angry shareholders filed a lawsuit charging that Robert Rubin and other insiders not only lied to them about the bank’s losses, but had also cashed in their own inflated stock options before the collapse. Later, the SEC agreed with shareholders that Rubin and other bank officials knew about the losses. Which, of course, means that they are guilty of both defrauding investors and insider trading.[liii] At last report, however, none had been indicted, although one bank officer was fined $100,000. But the hand-slap is laughable given Rubin’s reported earnings of $120 million while at Citigroup.[liv]

Citigroup may be the largest, but it is not the only big US bank involved in narco-trafficking. Others include Bank of America, American Express Bank, Wells Fargo and Wachovia, none of which has ever been criminally prosecuted in a US court for their participation in the drug trade. Recently, Bloomberg reporter Michael Smith learned the answer to the question why when he interviewed Jack Blum, a long-time US Senate investigator and banking industry consultant. Said Blum: “There’s no capacity to regulate or punish them [the big banks] because they are too big to be threatened with failure.” This explains why “they seem….willing to do anything that improves their bottom line, until they’re caught.” Blum called their too-big-to-fail status “a get-out-of-jail-free-card for big banks.”[lv]

That is certainly how it played out when Wachovia was caught red-handed in “the biggest money-laundering scandal of our time.” [lvi] The plot began to thicken in 2006 when Mexican authorities discovered 5.7 tons of cocaine packed in 128 black suitcases (estimated street value: $100 million) in a DC-9 at the international airport of Ciudad del Carmen, located 500 miles east of Mexico City. Authorities later learned that narco-traffickers had purchased the plane with funds laundered through Wachovia Corp. and Bank of America. It was no isolated incident. A 22-month federal investigation disclosed that during a three-year period alone, from May 2003 to May 2007, Wachovia had processed $378 billion in questionable transfers from Mexican currency exchange houses, in the form of wire transfers, traveler’s checks and cash shipments. The whopping figure is the equivalent of roughly one-third of Mexico’s gross domestic product.

The noose began to tighten on May 16, 2007, when DEA agents raided Wachovia’s international offices in Miami, seizing bank records. A “back look” at the transactions confirmed that drug cartels had used Wachovia’s correspondent banking services to launder a minimum of $110 million in drug profits. Doubtless, this was only the tip of the iceberg, but was still the largest violation of US money-laundering laws in history.[lvii] The cartels had used the laundered cash to purchase weapons, safe-houses, and aircraft for the narcotics trade. During the investigation, authorities also seized 22 tons of cocaine. According to Jeffrey Sloman, a federal prosecutor involved in the case, “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations.”[lviii]

When Wachovia’s own anti money-laundering officer, Martin Woods, attempted to bring the problem to the attention of bank officials, the same officials told him to keep quiet. Woods persisted, to his credit, and became the target of internal harassment and bullying by bank officials. He lost his job and, even though later vindicated by the federal probe, ultimately, had to bring suit against the bank to get restitution. In the end, Wachovia refused to curb its lucrative dealings with the dubious Mexican currency houses, that is, until the financial media began to report the ongoing federal investigation.[lix] But then, Wachovia has a long history of caring more about the almighty dollar than the people it serves. Founded in Charlotte, North Carolina in 1879, Wachovia foreclosed on so many farms and businesses during the Great Depression that the bank became known in the Southeast as Walk-over-ya.[lx]

Although federal authorities threatened Wachovia with criminal prosecution, the case never went to court. Despite its profits from money laundering, Wachovia suffered huge losses in 2008 as a result of the sub-prime fiasco, and was rescued by Wells Fargo for a reported $12.7 billion. The merger happened within days of Wells Fargo’s $25 billion federal bail out. Which, notice, means that the US taxpayer footed the bill for the acquisition (and then some). In 2010, Wells Fargo settled with the US government on behalf of Wachovia by paying $160 million in fines and penalties. Wells Fargo agreed to upgrade its money laundering detection efforts; and, after a year’s probation, the federal government dropped all charges in March 2011. Although the $160 million fine was a hefty sum, it was still less than 2% of Wells Fargo’s reported earnings in 2009. Indeed, bank officials probably viewed the fine as just another cost of doing business.

[vi] Dexter Filkins, Mark Mazetti and James Risen, “Brother of Afghan Leader Said to Be Paid by C.I.A.,” New York Times, October 27, 2009. Posted at http://www.nytimes.com/2009/10/28/world/asia/28intel.html?adxnnl=1&adxnnlx=1301436779-la8vOSwZTeQilE0VwwLONQ

[viii] Statement of Frederick P. Hitz, Inspector General CIA before the Permanent Select Committee on Intelligence, US House of Representatives, regarding investigation of allegations of connections between CIA and the Contras in drug trafficking to the US, March 16, 1998. Posted at http://www.fas.org/irp/congress/1998_hr/980316-ps.htm

[xliv] McCoy also pointed out in the same interview that Panama, once part of Columbia, is home to a miniature version of Wall Street. Panama City has a number of large banks, whose primary purpose is to launder money for Columbia drug lords. In short, the replacement of Noriega was an administrative move. The flow of drugs and drug money through Panama hardly paused, and may even have increased.